Principles of capital and risk management
Risk management in the Group
Within the Group, significant risks are examined annually as part of the strategy process. The aim of risk management is to identify, analyse and endeavour to manage possible threats and risks to operations in order to ensure the continuity of the Group’s operations and maximise share value. Operational units are responsible for day to day risk management and for taking pre-emptive measures. The most significant risks are presented to the Board of Directors and the Board approves the strategy at its August meeting.
The aim in managing the Group’s capital is to maintain a strong financial position and ensure that the financing needs of the operating activities can be met costefficiently as required.
The main source of financing in the Group is the positive cash flow from operating activities. The acquisition of finance from outside the company is centralised through the parent company’s financial management in accordance with the financing policy approved by the Board. The development of the Group’s capital structure is monitored and forecast at regular intervals. Key indicators are used to monitor ratios such as equity and net gearing.
Capital committed to business operations is made up of net working capital and fixed assets which are funded by shareholders’ equity and net debts.
Equity ratio at the end of 2012 was 48.2%. Following the Group’s strategy of focusing on publishing may lead to momentary changes in the capital structure in a given period of time.
Talentum Oyj employs an active policy on dividends. The final amount of the annual dividend is decided annually on the basis of factors such as short term operational opportunities and the capital structure at the time.
The slowdown in economic growth could affect Talentum’s revenues and revenue structures. About 40% of the consolidated turnover is dependent on advertising, and particularly the b-to-b sector, which is sensitive to economic conditions. The most economically sensitive part of advertising revenue is job advertising. Under the present economic conditions, the share of advertising is 30% of net sales. We endeavour to manage this market risk by increasing the revenue from circulation sales and the content sales service. Our goal is for all our products and services to be market leaders in their fields, so that success is possible even in a recession.
The economic uncertainty increases the uncertainty regarding, in particular, advertising sales receivables. Credit-loss risks are managed by following customers’ credit standing and by focusing on the follow-up of debts.
As an international group, Talentum is exposed to fluctuations in exchange rates. Subsidiaries are managed and monitored in their local currencies. The Group’s reporting currency is the Euro and converting subsidiaries’ income statements and balance sheets into this currency may affect the consolidated income statement and balance sheet.
Group subscriptions for major magazines are significant as far as coverage is concerned and contracts have been in place for several decades. Changes in these contracts could have major impacts on circulations and indirectly affect media sales.
Online services are change factors that could change the earnings logic of magazines and books temporarily or over the long term too. This channel selection could be significant for the Group’s revenue structure. The move from printed products to online products may be accelerated particularly under the poor economic conditions. If we are unable to develop our activities to respond to changes in media usage habits, it could undermine our competitiveness.
Our main subcontractors are printing houses, magazine distribution companies and network operators. This chain is exposed to operating risks and cost risks. This risk is minimised through long term contracts.
Most of the revenue from direct marketing comes from telephone sales of various publishers’ magazines and books. Any possible changes in the operating practices of the publishing sector will also be reflected in the net sales of direct marketing.
There is a risk in the direct marketing sector that legislation or consumer attitudes will change thus making telephone sales more difficult.
Our business is based on the skills of leading professionals, the creativity of a wide variety of talented and competent staff and a sufficient number of skilled people.
We motivate our staff through performance based pay, we develop skills through an active policy of job rotation, and we pay attention to training and the working environment.
Developed production processes and a readiness to adopt new technology and apply it rapidly, reduce staff related risks. Systemisation of working methods is also important so that carrying a project through to completion is not too dependent on individual members of staff.
Our production processes are based on the skills and abilities of leading professionals. Staff costs are a significant proportion of the Group’s total costs. Managing these costs is critical to the positive development of the Group’s profitability.
Changes in the costs of raw materials affect the development of the Group’s profitability. Printing and distribution costs are among those that are critical in publishing. We try to manage these pricing risks through competitive tender and long-term contracts.
Basic data security precautions are taken in each of our subsidiaries. Data network services are procured centrally from an external supplier at the highest possible service level and there are production back-up connections at the critical points in production. In the event that in spite of these back-up measures, data security is compromised it could cause damage to production as well as to commercial relationships and thus to the operating result.
Our operations depend on complicated information technology systems and data networks. Production material moves across the network from one phase to the next both within our own production operation and between subcontractors. There are deadlines in the production processes within which material must be ready for publication or printing. If there are long breaks in connectivity to the data networks at critical points in production and these breaks cannot be overcome using transferable media, then publication can be delayed beyond the agreed timings which can have an effect on customer relations and thus on business.
In their agreements and under the law, the Group’s companies bear responsibility that the services they produce do not infringe the rights of third parties or are otherwise illegal. It is possible that, in spite of the precautions taken, a third party will claim that services produced by the Group’s companies infringe a third party’s copyrights or other intellectual property rights or are in other ways illegal, for example, on the basis of freedom of speech or defamation legislation. If such an infringement of rights or illegality were to be detected, it may result in claims for compensation.
Protection of copyright is of the utmost priority in almost all of the Group’s companies. In order to benefit commercially from works, the Group must have the necessary copyrights to works and services that are provided to customers. If it were to be found that the Group did not have all the copyrights associated with a given product or service, then the Group would no longer be able to benefit from the commercial rights associated with that product or service and this could result in financial losses.
Developments in copyright and such things as internet related legislation, practices and technology could result in risks which we are unable to prepare for, and as a result of the multifarious forms issues can take, we may have to adapt to surprising, and thus unpredictable, changes which may weaken the profitability of our business operations.
We try to manage legal risks through many different measures: Talentum Group tries to ensure that all copyright and other immaterial rights resulting from our working relationships are transferred to the appropriate companies in the Talentum Group. In the contracts the Group enters into with its subcontractors we try to ensure that in each case the Group acquires sufficient rights to the service or product acquired. Similarly, with regard to the services and products produced by the Group, we try, in contracts with our customers, to reserve sufficient rights to use the materials and know-how they contain in other contexts too. The legality of the content produced by the Group is always checked with the Group’s legal director in uncertain or dubious cases. Staff, who are responsible for content, are guided and trained regularly in developments and interpretation of legislation and practice.
We try to protect ourselves against financing risks linked to business operations in the Talentum Group by creating financially sound conditions for developing the business. The general principles relating to managing financial risk in the Group are approved by the Board of Directors. Financing of the Group is centralised in Talentum Oyj’s finance department.
The personnel, property and operations of companies in the Talentum Group are covered by insurance policies. The coverage of the policies, the values insured and excess values are revised annually with a broker and insurance companies.